Many people wonder about the differences between cost accounting and financial accounting. Both accounting methods can help make more effective decisions as a business manager. Yet, there are significant differences between the two.
Let’s first start by defining each one.
- Cost accounting applies costing methods and techniques to reduce business costs. Its main goal is to calculate the cost per unit of your business’ products or processes.
- Financial accounting classifies, stores, records, and analyzes a company’s financial statements. The goal is to improve the business’s profitability and increase its transparency. Financial accounting presents an accurate financial picture of a company to the stakeholders.
The major differences between cost accounting and financial accounting are as follows:
- Cost accounting helps you determine the expenses associated with each of your products. Financial accounting helps better understand a company’s profitability through its financial statements.
- Cost accounting is a tool used by management to improve business process efficiency. Financial accounting presents the business’s performance.
- Cost accounting focuses on the internal aspects of a company. Financial accounting focuses on its external aspects. While cost accounting helps improve a company’s processes, financial accounting is profit-oriented.
- The use of cost accounting is not mandatory in all companies. Only those using manufacturing processes or activities must use cost accounting. Yet, the use of financial accounting is a must for all organizations.
- Cost accounting is not performed as per any particular period. Rather, it’s performed in a short interval of time as in the production of a unit or product. Financial accounting records an organization’s financial activity for a given financial period.
- Additionally, estimation is important in cost accounting. It helps determine the per-unit cost of sales. In contrast, every transaction in financial accounting is reporting based on actual data.
- Cost accounting uses tools to help improve the efficiency of business operations. These include the cost of sales, product margin, and selling price of products. Financial accounting uses financial statements, journals, ledgers, and trial balances.
- There are also differences in presentation between the two methods. Financial accounting requires specific format parameters. As for cost accounting, the format of reports can vary.
It’s clear that cost accounting and financial accounting are quite different. There are many benefits to using both approaches. Combining these methods is a powerful tool to propel your business to the next level.
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Anjali K V S. “Difference between financialaccounting and cost accounting.” LinkedIn SlideShare. February 18, 2017. Accessed January 06, 2018. https://www.slideshare.net/anjali106/difference-between-financialaccounting-and-cost-accounting-72297700.